Giffen paradox

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Course of the Giffen demand curve

The Giffen paradox (also known as the Giffen case ) describes the phenomenon that, in certain situations, the demanded quantity of a good increases when its price increases. The classic assumption, on the other hand, says that demand decreases when the price increases ( law of demand ).

Origin and early reception history

Since the third edition of his Principles of Economics, Alfred Marshall has been referring to the observation of the Scottish statistician Robert Giffen (1837-1910), according to which households living on the subsistence level reacted to an increase in the price of bread with an increasing demand for bread:

“There are however some exceptions. For instance, as Mr Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer laboring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with they must be treated separately. "

“There are a few exceptions, however. For example, as Mr Giffen noted, an increase in the price of bread places such a heavy financial burden on poor working-class families and increases their marginal utility so dramatically that they are forced to cut back on their consumption of meat and more expensive cakes; but they are increasing their consumption of bread, the cheapest food, instead of decreasing it. Such cases are rare; if you meet them, everyone has to be treated individually. "

- Alfred Marshall : Principles of Economics. An introductory volume.

In the literature, however, it has been noted several times that the attribution of this observation to Robert Giffen appears problematic. For example, George J. Stigler (1947) notes that there is no corresponding reference to be found in Giffen's work. Stigler rejected a later text passage suggestion by Allan R. Perst, for which reference is made here to a footnote. In any case, there is agreement that Giffen - even if he should have pointed out - was not the first to observe the phenomenon. As early as 1815, in the notes of Simon Gray, a worker in the British War Office , under the heading “A rise in the price of bread corn, beyond a certain pitch, tends to increase the consumption of it” (“An increase in the price of grain for bread production often increases consumption from a certain level ”) find a detailed description. He concludes:

“By raising the price of bread corn, thus, far from making the people live less on that necessary, as so many, who have not thoroughly considered the matter, imagine, we force them to live more on it; and beyond a certain price, almost entirely. However, paradoxical, therefore, it may be in seeming, it is a plain substantial fact, that the higher price of corn and potatoes, the greater is the consumption [...] ”

“It is for this reason, contrary to what so many who have not carefully considered the assumption, that increasing the price of grain for bread-making does not make people live less on that staple, but rather has as a result, we force them to make a greater living from it; and above a certain price even almost completely. As a result, as paradoxical as it may seem, it is a simple fact that the higher their price, the greater the consumption of grain and potatoes [...] "

- Simon Gray : The happiness of states, or, An inquiry concerning population, the modes of subsisting and employing it, and the effects of all on human happiness.

Empirical literature

Francis Edgeworth expressed himself skeptically in 1909 in the course of a book review about the possibility introduced by Marshall; Referring to the work discussed, in which it was postulated, among other things, that a higher price of wheat could also increase demand, Edgeworth noted, referring to Alfred Marshall, also “knowing that the statement [according to which the elasticity of the demand for wheat could be positive , Emphasis in the original], had a high authority as an advocate ”, it appeared to him so contrary to the a priori probabilities that it required“ very strong ”evidence.

Theoretical classification

Goods in which the Giffen paradox occurs are referred to as Giffen goods . In economic terms, they are inferior goods that have a positive price elasticity (this follows from the Slutsky equation ). Therefore, it should also be noted that not all inferior goods are Giffen goods (as example 2 below shows), but all Giffen goods are necessarily inferior goods. If the change in demand due to a price change is broken down into income and substitution effects, the income effect dominates over the substitution effect in the case of Giffen goods.

Examples

example 1

Someone has 3 euros a day for food. Every day he buys a loaf of bread for 1 euro and a piece of meat for 2 euros. Now the price of bread rises to 1.50 euros. Since he doesn't have enough money left for meat after a loaf of bread, he buys another loaf of bread instead.

Example 2

A student has a limited budget of 30 euros per week (5 days) for his daily lunch. Since he prefers to go to the nearby restaurant during his lunch break, he needs a large part of his lunch budget to dine there twice for 9 euros each. On the other three days he alternately goes to the canteen and a pizzeria, where meals cost 4 euros each, and on average the same number of times. If he had to cut his weekly lunch budget by 10 euros, he would have to cancel his restaurant visits and only go to the cafeteria or the pizzeria. Both lunch options are therefore absolutely inferior goods. However, if the pizza price were to increase, he would cancel visits to the pizzeria and always eat in the cafeteria on days when he does not eat in the restaurant. So the pizza is not a Giffen good here, even though it is an absolutely inferior good.

Example 3

Another example of Giffen goods could be beans in a poor society where consumers spend most of their income on relatively cheap beans and relatively more expensive meat. When the price of beans goes up, consumers can no longer afford meat because they have to spend more of their income on the same amount of beans, so they don't buy meat but buy more beans. The income effect of the price increase has more than offset the substitution effect.

Web links

literature

Individual evidence

  1. ↑ Rein Haagsma: Notes on Some Theories of Giffen Behavior. In: Wim Heijman and Pierre von Mouche (Eds.): New Insights into the Theory of Giffen Goods. In: Lecture Notes in Economics and Mathematical Systems. Vol. 655. Springer, Heidelberg a. a. 2002, ISBN 978-3-642-21776-0 , doi : 10.1007 / 978-3-642-21777-7 , pp. 5-19, here pp. 5 f.
  2. ^ Alfred Marshall : Principles of Economics. An introductory volume. 3rd ed. Macmillan, London 1895, p. 208.
  3. ↑ George J. Stigler : Notes on the History of the Giffen Paradox. In: Journal of Political Economy. 55, No. 2, 1947, pp. 152-156 ( JSTOR 1825304 ).
  4. ^ Allan R. Perst: Notes on the History of the Giffen Paradox. A comment. In: Journal of Political Economy. 56, No. 1, 1948, pp. 58-60 ( JSTOR 1825029 ).
  5. ↑ “It may be suggested that as the fall in [the price of] cereals cannot be ascribed to an excessive growth of the production of the cereals themselves, it must be ascribed, seeing that there has been a great increase of the resources of the consuming peoples themselves, to a diminution of demand arising from various causes. What can be the causes? Why do people as they grow richer consume less wheat etc. instead of more? The answer to the last question is to be found, I think, in an examination of the figures as to livestock ... People consume less cereals per head because, with their increase of resources, they consume more meat, which pro tanto displaces the cereals. ” From Richard Giffen: The Real Agricultural Development of the Last 20 Years, printed as Appendix V in the Final Report of the Royal Commission on Agricultural Depression. Quoted from Allan R. Perst ibid.
  6. ↑ George J. Stigler: Notes on the History of the Giffen Paradox. A reply. In: Journal of Political Economy. 56, No. 1, 1948, pp. 61-62 ( JSTOR 1825030 ).
  7. ^ Simon Gray: The happiness of states, or, An inquiry concerning population, the modes of subsisting and employing it, and the effects of all on human happiness. Hatchard, London 1815. For details, see Etsusuke Masuda and Peter Newman: Gray and Giffen Goods. In: The Economic Journal. 91, No. 364, 1981, pp. 1011-1014 ( JSTOR 2232507 ). In this sense also Rein Haagsma: Notes on Some Theories of Giffen Behavior. In: Wim Heijman and Pierre von Mouche (Eds.): New Insights into the Theory of Giffen Goods. In: Lecture Notes in Economics and Mathematical Systems. Vol. 655. Springer, Heidelberg a. a. 2002, ISBN 978-3-642-21776-0 , doi : 10.1007 / 978-3-642-21777-7 , pp. 5-19, here p. 6; George J. Stigler: Notes on the History of the Giffen Paradox. In: Journal of Political Economy. 55, No. 2, 1947, pp. 152-156 ( JSTOR 1825304 ), here p. 154.
  8. ↑ Quoted from Etsusuke Masuda and Peter Newman: Gray and Giffen Goods. In: The Economic Journal. 91, No. 364, 1981, pp. 1011-1014 ( JSTOR 2232507 ), here p. 1013.
  9. ^ Francis Y. Edgeworth : Free Trade in Being by Russell Rea. Review. In: The Economic Journal. 19, No. 73, 1909, pp. 102-106 ( JSTOR 2220520 ), here p. 105.
  10. ^ David Ricardo: On the Principles of Political Economy and Taxation. Retrieved April 19, 2019 .
  11. ↑ Jonas Regul: Value of inferior goods . Ed .: Cengage Learning. 1st edition. Cengage Learning, April 2018.